Reliant Energy, Inc. (RRI): Guidance reflects lower gas prices, offset by higher capacity revs - Goldman Sachs - 11/08/07
News
Reliant Energy (RRI-Buy) reported estimated ongoing EPS of $0.51, excluding impacts of MtM and derivatives losses, slightly below our estimate of $0.56 and beating consensus of $0.46. EBITDA came in at approximately $400 mn, missing our estimate of $473 mn. The company lowered 2007-2008 EBITDA guidance by $100 mn each year to reflect a lower natural gas outlook, partially offset by higher capacity revenues, while maintaining 2009 guidance. Our forecast assumes a gas price outlook roughly $0.25-$0.50/MMBtu higher than the levels included in guidance. Guidance for FCF also declined slightly for 2007-2008, but increased by 3% for 2009.
Analysis
Despite in-line to mildly positive results for 3Q2007, we expect investors to focus primarily on 2009 EBITDA and FCF, which remain largely unchanged. We remain Buy-rated on RRI and see more than 19% total return to our target price of $31 per share (based on our sum-of-the-parts analysis). We recommend investors buy the shares on any dips as the stock remains one of our top picks in the Diversified and IPP sectors. Reliant's
improving balance sheet provides significant flexibility as debt to capital ratios remain low at approximately 41%, increasing the likelihood of buybacks and capital allocation going forward.
Implications
Investors will likely focus on
(1) plans for capital allocation and "re-leveraging" potential,
(2) outlook on retail market share,
(3) updated guidance where EBITDA guidance was lowered near term but reiterated for 2009, and
(4) environmental capital spending in PA and OH.
A conference call is scheduled for today at 11am ET, dial-in (877)-267-2088.
Primary risks include:
(1) lower-than-expected commodity prices,
(2) higher environmental spending, and
(3) higher-than-expected retail churn or lower margins. |
